This document discusses cost allocation, customer profitability analysis, and sales variance analysis. It covers assigning indirect costs to cost objects, customer revenues and costs, criteria for cost allocation decisions, and analyzing variances in sales quantity, mix, market share, and market size. The overall purpose is to provide information for economic decisions, motivate managers, justify costs, and measure income and assets for reporting.

1. CHAPTER 14
Cost Allocation,
Customer Profitability Analysis,
and
Sales-Variance Analysis

2. 14-2
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Cost Allocation
 Assigning indirect costs to cost objects
 These costs are not traced
 Indirect costs often comprise a large
percentage of Total Overall Costs

3. 14-3
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Purposes of Cost Allocation
1. To provide information for economic
decisions
2. To motivate managers and other employees
3. To justify costs or compute reimbursement
amounts
4. To measure income and assets for reporting
to tax authorities

4. 14-4
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Six-Function Value Chain
Research
&
Development
Distribution
Marketing
Production
Design
Customer
Service
TIME
 Traditional Life Cycle approach may not yield the costs
necessary to meet the four-purpose criteria for cost allocation
 Costs necessary for decision making may pull costs from some
or all of these six functions

5. 14-5
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Criteria for Cost-Allocation Decisions
 Cause and Effect – variables are identified
that cause resources to be consumed
 Most credible to operating managers
 Integral part of ABC
 Benefits Received – the beneficiaries of the
outputs of the cost object are charged with
costs in proportion to the benefits received

6. 14-6
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Criteria for Cost-Allocation Decisions
 Fairness (Equity) – the basis for establishing a price
satisfactory to the government and its suppliers
 Cost allocation here is viewed as a “reasonable” or
“fair” means of establishing selling price
 Ability to Bear – costs are allocated in proportion to
the cost object’s ability to bear them
 Generally, larger or more profitable objects receive
proportionally more of the allocated costs

7. 14-7
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Customer Revenues and
Customer Costs
 Customer-Profitability Analysis is the
reporting and analysis of revenues earned
from customers and costs incurred to earn
those revenues
 An analysis of customer differences in
revenues and costs can provide insight into
why differences exist in the operating income
earned from different customers

8. 14-8
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Customer Revenues
 Price discounting is the reduction of selling
prices to encourage increases in customer
purchases
 Lower sales price is a tradeoff for larger sales
volumes
 Discounts should be tracked by customer and
salesperson

9. 14-9
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Customer Cost Analysis
 Customer Cost Hierarchy categorizes costs
related to customers into different cost pools
on the basis of different:
 types of drivers
 cost-allocation bases
 degrees of difficulty in determining cause-and-
effect or benefits-received relationships

10. 14-10
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Customer Cost Hierarchy Example
1. Customer output unit-level costs
2. Customer batch-level costs
3. Customer-sustaining costs
4. Distribution-channel costs
5. Corporate-sustaining costs

11. 14-11
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Other Factors in Evaluating Customer
Profitability
 Likelihood of customer retention
 Potential for sales growth
 Long-run customer profitability
 Increases in overall demand from having
well-known customers
 Ability to learn from customers

12. 14-12
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Sales Variances
 Level 1: Static-budget variance – the difference
between an actual result and the static-budgeted
amount
 Level 2: Flexible-budget variance – the difference
between an actual result and the flexible-budgeted
amount
 Level 2: Sales-volume variance
 Level 3: Sales-quantity variance
 Level 3: Sales-mix variance

13. 14-13
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Sales-Mix Variance
 Measures shifts between selling more or less of
higher or lower profitable products
Budgeted
Sales-Mix
Percentage
Actual
Sales-Mix
Percentage
X
Budgeted
Contribution
Margin per Unit
Sales-Mix
Variance =
Actual
Units of
All
Products
Sold
X

14. 14-14
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Sales-Quantity Variance
Budgeted
Units of all
Products
Sold
Actual
Units of All
Products
Sold
Budgeted
Contribution
Margin per Unit
Sales-
Quantity
Variance
=
Budgeted
Sales-Mix
Percentage
X X

15. 14-15
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Market-Share Variance
Budgeted
Market
Share
Actual
Market
Share
X
Budgeted
Contribution
Margin per
Composite Unit
for Budgeted
Mix
Market-
Share
Variance
=
Actual
Market
Size in
Units
X

16. 14-16
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Market-Size Variance
Budgeted
Market
Size
Actual
Market
Size
Budgeted
Contribution
Margin per
Composite Unit
for Budgeted
Mix
Market-Size
Variance =
Budgeted
Market
Share
X X

17. 14-17
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Market-Share and Market-Size
Variances
 Limitation: reliable information on the actual
size and share of various markets is not
always available
 These are considered Level 4 variances (a
decomposition of the Sales-Quantity variance